How to make the most out of your spousal RRSP

Whether you have a spouse or common-law partner, it’s always a good strategy to plan your retirement together. Even before retirement, maximizing savings and taking advantage of tax benefits available to you can be crucial for creating a good life as a couple. In Canada, one strategy to achieve goals like these is to make good use of the spousal Registered Retirement Savings Plan (spousal RRSP).

By understanding and leveraging the benefits of the spousal RRSP, couples can make the most of this opportunity to pursue a financially secure future. In this article, we explore the various aspects of spousal RRSPs, including their advantages, strategies to maximize their benefits, and potential challenges.

What is a spousal RRSP?

The spousal RRSP is a version of the Registered Retirement Savings Plan (RRSP) with some enhancements to better fit the needs of couples. This type of RRSP is designed to allow couples (whether married or in a common-law partnership) to:

• even out their retirement savings
• reduce the amount of taxes they pay
• split their income equally after they retire
• withdraw the annuity or Registered Retirement Income Fund (RRIF)

What’s the difference between the RRSP and Spousal RRSP?

Apart from the RRSP being for only one person and the spousal RRSP being for couples, the main difference is that one of the spouses or common-law partners is the plan owner or annuitant. The other spouse or common-law partner is the one who contributes to the plan.

Usually, the annuitant in a spousal RRSP is the one who: 

• earns less than the other person
• can withdraw money from the RRSP
• is subject to a lower/marginal tax rate when withdrawing money from the RRSP

Why is it important to make the most of the spousal RRSP?

You get to save for retirement while reducing or deferring taxes. You may even get bigger savings that you can choose to put into your retirement fund or use for other purposes.

By maximizing your spousal RRSP, you and your spouse or common-law partner also have a better chance at building a source of retirement income than you would without it.

Advantages of the spousal RRSP

Did you know that there are some ways to use the spousal RRSP to improve the quality of your life, even before you reach retirement? Here are a few benefits to the spousal RRSP you might not be aware of:

1. You can use it to buy your first home

Couples can withdraw some money from their spousal RRSP through the Home Buyers’ Plan or HBP. With the scheme, new home buyers can withdraw up to $35,000. But if it’s a couple using their joint RRSP for HBP, they can withdraw up to $35,000 each for a total of $70,000.

With this scheme, they can use this money for buying their new home without paying tax, as long as the fund has been around for at least 3 years.

The only catch is that any amount withdrawn for HBP would have to be paid back within 15 years. Repayments are made by the contributor of the spousal RRSP to their personal RRSP.  

2. You can use it to further your education

Another way for couples to leverage their RRSP is to use some of the money to finance their continuing education. This is done via the Lifelong Learning Plan or LLP.

What the LLP allows is for one or both partners in a spousal RRSP to withdraw up to $10,000 each, for a limit of $20,000 in withdrawals for the calendar year.

One significant benefit: qualified students can participate in the LLP for as many times as they want in their lifetime. However, they must pay back the LLP in full and wait a year before they can participate in the program again.

3. You can use it to start a family

If your spouse wants to take a leave from their job after having a baby, they can take some money from the spousal RRSP to take care of living expenses or buy supplies for the new baby. The proud parents can also withdraw some of the RRSP money at a lower tax.

As for the higher income earner/contributor, they can contribute to the spousal RRSP and get a tax break equivalent to up to 50% of the contribution.

4. It offers tax deductions

The contributors to the spousal RRSP can have their taxable income reduced by getting tax breaks. These tax deductions can be applied in the year the contributions were made or have them carried forward to succeeding years.

5. You can do income splitting

Instead of withdrawing a large annuity when the RRSP is converted to an RRIF and paying a large tax, couples can split the income they receive. The great news is each gets taxed only for their half!

Here’s a useful video that can explain income splitting in more detail (starting at the 7:30 mark for spousal RRSP):

6. You can still save for retirement

It’s commonly known that when one of the spouses or common-law partners turns 71, they may no longer contribute to their personal RRSP in December of that year. This is due to the mandatory requirement that their RRSP converts into a Registered Retirement Income Fund (RRIF) when they reach that age.

However, if a spouse is still earning even beyond the retirement age, they can make contributions (up to their contribution limit) into the RRSP of the younger spouse. This is possible until December of the year when the younger spouse turns 71.

Disadvantages of the Spousal RRSP

The spousal RRSP is not without its drawbacks, and there are a couple:

1. There’s a 3-Year Attribution Rule

After you get married or enter into a common-law partnership and start an RRSP with your partner, you cannot touch any amount of money in it after making the first contribution.

The money must remain in the account for the remainder of the calendar year, plus an additional 2 years before any amount can be withdrawn by the annuitant.

In addition, the 3-year requirement is applied to the most recent contribution, not the first one.

Should money be withdrawn before fulfilling the 3-year requirement, the withdrawn amount will be included in the contributor’s taxable income for that year. But there are exceptions, such as withdrawals for the Home Buyers’ Plan or Lifelong Learning Plan. These withdrawals are allowed within 3 years of the most recent contribution.  

This rule of taxing the contributor also doesn’t apply to withdrawals under these conditions:

• withdrawal was made after the relationship ended (divorce or breakup of common-law partnership)
• the contributor died during the year of the withdrawal

These rules are in place since in a joint RRSP, the annuitant is the owner and is the only one who can make withdrawals. In most other cases, withdrawal rules for a spousal RRSP follow the same rules as a regular RRSP.

2. Spousal RRSP can get complicated if the relationship breaks down

Although the annuitant owns the account, the contributor has the right to seek out an equalization payment to even things out. In case of a divorce or breakup, it’s important to seek advice from an experienced professional, such as a certified financial advisor.

What happens to an RRSP if a spouse dies?

While this is a rather grim topic, it’s a necessary one to cover. In a nutshell, here’s what can happen to the RRSP when a spouse dies:

• The money in the RRSP goes to the designated RRSP beneficiary. This can be the spouse or partner, but not always. Sometimes the holder of the RRSP may designate someone else as the beneficiary in their will. The beneficiary will then have to declare this as income and pay the appropriate tax.
• The RRSP can be rolled into a qualifying survivor’s RRSP or RRIF. This is a way for the qualifying survivor to avoid paying any tax on that money or on the deceased’s final tax return. The qualifying survivor pays tax only when they withdraw the money.
• If the deceased spouse didn’t name a beneficiary, then the money in the RRSP or RRIF will be withdrawn, and the corresponding taxes will be charged to the deceased’s estate.

Who can contribute to the spousal RRSP?

The contributor to the plan is usually the spouse or partner with the higher income. They benefit from doing this by receiving tax deductions for the year they made contributions to the plan.

How much can they contribute?

The amount can vary depending on rules set by the Canada Revenue Agency (CRA). For 2022, contributions are calculated by figuring out the total of your unused deductions from the previous year. Once that is calculated, add:  

• 18% of the income reported last year
• The annual limit for 2022, which is $29,210

Then if appropriate, subtract any pension adjustment from the previous year to get your contribution limit. While this can give a good estimate of the contribution, you can contact CRA to be sure.

How does contributing to the spousal RRSP benefit couples?

Contributing to this type of RRSP benefits couples mainly by lowering their taxes. The contributing spouse or partner gets to have their personal taxes deducted and have their personal tax owed lowered for that year. Meanwhile, the annuitant gets taxed at a lower marginal tax rate.

Another benefit is that any withdrawals are taxed at the annuitant’s lower tax rate.

What are the Spousal RRSP Rules?

These are rules regarding the contribution limits. The limits are the same whether you have 1 or 2 accounts.

For example, if your contribution limit is set at $20,000, you can divide that amount any way you want between your RRSP and the spousal RRSP.

In this case, you can allot $12,000 for one and $8,000 for the other. Or place $10,000 equally. You can distribute it any way you like as long as your total contributions don’t exceed the $20,000 limit.

Always remember: any excess of your contribution limit will be charged with income tax. A spousal RRSP doesn’t give you additional contribution room.

And as with the regular RRSP, you can keep contributing to your spousal plan until the end of the year when your spouse reaches the age of 71. As for the deadlines for depositing contributions, spousal RRSPs share the same dates as regular RRSPs.

Keep in mind that effective retirement planning requires open communication and collaboration between partners. It’s crucial to assess your individual retirement goals and financial situations, then discuss how a spousal RRSP can help you achieve them.

Make sure to use your tax benefits, manage your contributions and withdrawals wisely, and keep yourselves informed about potential challenges. Doing this can help you navigate the complexities of spousal RRSPs with confidence.

And as you begin this journey, seek guidance from financial advisors who can provide sound financial advice tailored to your specific needs. With careful consideration and informed decision-making, your Spousal RRSP can serve as a powerful tool to secure a comfortable and fulfilling retirement for both you and your partner.

What do you think about these strategies for maximizing your spousal RRSP? As a couple, does this type of RRSP fit into your retirement plan? Let us know your thoughts in the comments!